The recent equity downturn has provided an opportunity for a Roth Conversion. A Roth conversion allows funds to be moved from a Traditional IRA fund to a Roth IRA. Investors must pay tax on the conversion at the time, but all growth is tax free forever.
A Roth IRA differs from a traditional IRA in that all growth is tax free. Traditional IRA’s and most retirement plans (401(k)’s, 403(b)’s, etc.) are tax-deferred. Tax deferred means that a deduction is allowed at the time of the contribution and the growth of the funds are not taxed until they are withdrawn. Additionally, beneficiaries to most retirement plans and IRA’s will pay tax on the receipt of funds unless they are deferred again via various limited options. Contributions and transfer to Roth IRA’s are not tax deductible.
This is an opportunity worth considering because Roth conversions are more effective than they were three to four months ago. As an example, the S&P 500 ETF was priced at $291 on October 1, 2018. At December 31, 2018 it was priced at $250. That is a 16% discount or conversely you can now convert 16% more shares with the same tax effect.
Due to a major change in Tax Rules starting in 2018, Roth Recharacterizations are no longer available. Unlike in previous years, once investors make the Roth conversion, with limited exceptions, they cannot recharacterize the conversion or change it back to a traditional IRA.
This is a great opportunity for many situations. As always, if we can help in some way or answer questions, please let us know.
Happy New Year!
Your AP Wealth Team
GENE MCMANUS, CPA, CFP®
PAT FAIR, CFP®
TOM O’GORMAN, MBA